XYZ (a firm the produces consumer goods) is a stable company reporting the following financial information:
Earnings per share $1.50 -
Dividends per share $0.30 -
Net Income $5 million -
Equity $50 million -
Given the above information, calculate the company's expected dividend growth rate.
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A. B. C. D. E. F.E
The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = (1 - (.3/1.5)) x ($5 million/$50 million) = (1 - .20) x (.10) = .08 or 8%.